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The Agency Costs of Free Cash Flow: Acquisition Activity and Equity Issues

Steven V. Mann and Neil W. Sicherman
The Journal of Business
Vol. 64, No. 2 (Apr., 1991), pp. 213-227
Stable URL: http://www.jstor.org/stable/2353063
Page Count: 15
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
The Agency Costs of Free Cash Flow: Acquisition Activity and Equity Issues
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Abstract

Jensen argues that there are agency costs associated with free cash flow. This study extends that argument and posits that shareholders condition their valuation decisions on firms' reputations regarding free cash flow abuse. We test this notion by examining share price responses to equity offers, which generally exacerbate the cash flow problem, for firms differentiated by their recent acquisitive behavior. The results suggest that shareholders react more favorably to equity issue announcements if firms have acquired only assets related to their core business than to other equity issue announcements.

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